Laying the Foundations for a brighter future

The latest figures released by the Government suggest that the UK is officially in recession again. The Economist cited the construction industry as one of the key reasons for this double-dip, as it suffered a decline of 3% over the past quarter. However, does this data really reflect the state of the construction market? Are there any positives to take out of recent announcements? And what can the Government do to drive growth in the sector?

First into recession …

A number of forces have contributed to the downturn in construction activity, some more obvious than others. The public sector has historically contributed up to 40% of the industry’s revenue, but austerity measures have had a dramatic impact on this. With the withdrawal of the Building Schools for the Future (BSF) programme, fewer affordable homes being built, and the introduction of the new Health Bill, many large projects in the social housing, health and education sectors have been put on hold.

… and first out of recession?

There are chinks of light on the horizon however. According to the latest insight from Glenigan, the value of projects awarded in Q1 2012 was 21% higher than in the previous year. Key drivers of this growth have been the infrastructure, civil engineering and private housing markets, with the announcement of a £2 billion pension fund to invest in infrastructure, several major rail projects such as HS2 and Crossrail, and the £150 million expansion of the Get Britain Building initiative. In addition, the UK’s ageing energy infrastructure requires considerable upgrading over the coming years, in order to replace old capacity being taken offline and to meet renewable energy targets.

Another segment of the market that many people feel is not properly reflected in the official data are the domestic repair and maintenance and home improvement markets because much of the paid expenditure is in cash. With interest rates so low, there is evidence that people are investing their cash in their homes rather than leaving it in the bank, and many firms serving this end of the market are thriving (but don’t tell the tax man).

A helping hand

Construction and building remains a major source of revenue and jobs for the UK economy. Employing approximately three million people across the value chain in companies offering products, services and professional services, the industry contributes c.13% of UK GDP. Studies have shown that, for every £1 invested in the construction sector, the economy can reap a £3 benefit through the multiplier effect.
So what should the Government be doing in order to drive growth in the sector? Here are some of our thoughts:

Clarify and simplify the various Government-backed energy efficiency incentives, such as the Green Deal, Renewal Heat Incentive and Renewable Heat Premium Payment, in order that contractors and consumers better understand the processes and benefits involved (see our previous comment on changes to the feed-in tarrif);

Consider reducing VAT on home improvements, encouraging further spending by homeowners and bringing more of this industry ‘above board’;

Hurry up and ease the red-tape around planning regulations (e.g. through the Localism Act) and sell off excess land in order to stimulate new developments; and

Continue to invest in large infrastructure projects such as Crossrail that will bring direct and indirect economic benefits to the UK.

On the people side, another concern that the Government needs to address is a growing skills shortage in the construction and related engineering sectors. During the recession, the construction sector has suffered the highest redundancy of any UK industry, resulting in a sustained skills drain from the industry. In addition, construction and engineering are not regarded by school-leavers and graduates as attractive or lucrative professions, limiting the number of high-calibre people entering the industry. The Government should address this by encouraging employers to take on skilled apprentices through tax breaks or other means, and by encouraging students to undertake engineering degrees through tuition fee reductions or incentives.

From an M&A perspective, there is a cautious optimism for 2012 after a relatively quiet few years. Considerable opportunities exist in specialist niche sectors such as energy and rail infrastructure, and with considerably improved balance sheets, UK and overseas companies are thinking about acquisitions again. Companies looking to sell should ensure that they are capitalising on opportunities both in the UK and overseas in order to make themselves as attractive as possible. With this increased appetite, alongside some government-led encouragement, the construction industry will be able to build itself a better future.